We made a mistake

Errors in governance and administration are inevitable, and in voluntary organisations those governing and administering the entity often lack the skills to know what, who, how, and when to do things.  The previous article, Good Governance of a Society set out some of the problems, while other earlier articles have discussed the content and binding nature of constitutions and disciplinary issues.

The fact that mistakes have (allegedly) been made may be raised with an organisation by those in governance or management, by an entity’s members (see the next article in this series), or by external agencies (for instance, by auditors, funders, the Registrar of Incorporated Societies or the Charities Commission).

While there may be a natural tendency to deny that a mistake has been made or to become defensive when a mistake is alleged, such responses are seldom helpful and frequently aggravate the problem.  Further, the longer irregularities are left uncorrected the more likely it is that what may be a minor problem will escalate into a major crisis.

When alleged mistakes are identified, a number of steps may be helpful:

  1. First, clarify the nature and details of alleged mistake or problem. Analyse the relevant documentation and events, identify those responsible for the possible mistake, and check whether there may be more to the allegation than may first appear (the issue may indicate systemic issues, the problems may be the tip of an iceberg of similar problems, the problems may involve either or both of poor governance and administrative procedures, there may be financial implications, there may be possible fraud involved, etc).
  2. Once the nature of the alleged mistake is clearer, consideration should be given to who should be involved in undertaking any necessary investigation. This will include considering whether the entity should obtain specialist legal, accounting, auditing, or other expert advice, and whether assistance may be required from other entities (such as associated bodies, people previously holding senior positions with or in the entity, the Police, or the Charities Commission).
  3. Careful thought needs to be given to how much information must or should be provided to the governance team, any staff, the entity’s members, supporters and clients, and the wider public. Rumour and speculation are seldom productive, but seemingly unwarranted secrecy can also be damaging. There needs to be a “game plan” to respond to enquiries about the allegations and to deal with any unwelcome publicity.
  4. Confidential information about the problem needs to be kept confidential. If such confidential information is disclosed to anyone, the obligations of confidentiality and the potential damage that can be caused by breach of such a degree of confidentiality should be clearly spelt out. Legal professional privilege may be a blessing in such situations (and other advisers asked to report to the entity’s lawyer).
  5. Once the problem has been investigated, decisions need to be made about dealing with any mistake confirmed to have occurred.

Mistakes generally fall into one or more of the following categories:

  • Poor communication of information, inadequate responses to questions, and misalignment of ideals and directions,
  • Failures by those in governance or management to follow the entity’s constitution,
  • Failures to follow statutory processes relevant to the entity (e.g. the Incorporated Societies Act 1908 or Charitable Trusts Act 1957),
  • Failures to comply with the usual rules or principles of meeting procedure or natural justice, or
  • Mismanagement or misappropriation.

Fixing identified problems requires solutions tailored to the facts, but any solution must be lawful, practical and bear scrutiny from members, the public, the Charities Commission (if the entity is a registered charity), and a Court. It is important to recognise that both the problem and resolving it involves individuals and groups whose emotions, passions, and pockets may be involved. Some people find it hard to forgive errors or the “let go” of an issue, and these factors can lengthen the healing or resolution process, result in long-term resentments, and produce organisational schisms, to say nothing about huge costs.

Sometimes no great formality may be required, and a well-handled meeting (or, even, facilitated mediation) may resolve the issue. However, sometimes more formal options may need to be considered, such as:

  • Putting the issue to the members of a society in general meeting or to the trustees of a charitable trust – perhaps to ask the governing body’s to ratify or approve the allegedly improper actions or adopt challengeable decisions previously made for the entity,
  • Amending the entity’s constitution,
  • Disciplinary or member termination processes under the constitution or employment law,
  • Complaints to the Police or Charities Commission, and
  • Application to the High Court either for judicial review or under statutory provisions (such as section 21(3A), Incorporated Societies Act where a condition precedent to making a rule change has not been fulfilled – see cases such as Pap v Hungarian Society (Auckland) Inc, High Court, Auckland, M 1616/93, 13 December 1993, Tompkins J, and Murray v The Hearing Association Hastings Branch (Inc), High Court, Napier CP 28/99, 15 March 2000, Heron J.

Finally, it is worth remembering that the High Court decision in Porima v Te Kauhanganui o Waikato Inc [2001] 1 NZLR 472, paras [77]–[85] confirmed that the “law has some ability to address crisis situations, as and when they arise,” “has an inherent jurisdiction . . . to preserve assets or resolve deadlock situations,” and may “intervene where there has been an error of law through the breach of the rules of a society.” This indicates that, contrary to older authority, the right to seek Court intervention is not limited to the personal financial, commercial, or employment interests of members.

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.